Customer loyalty

Caveat vendor

Not all loyal customers are profitable—or vice versa

WHEN Welf Ebeling, chief operating officer for The Leading Hotels of the World group, ran the Breidenbacher Hof, a swanky hotel in Düsseldorf, he noticed that some of his most loyal customers constantly telephoned the concierge with impossible requests. These “attention-seekers” were often less profitable than other loyal customers who made fewer demands but spent more.

Mr Ebeling's observation fits neatly with the thesis of an article in July's Harvard Business Review by Werner Reinartz and Viswanathan Kumar. The authors, both marketing professors, argue that companies tend to assume that loyal customers are cheaper to serve and willing to pay more than others, and also good at attracting new business. But, after studying a high-tech corporate-services provider, a French grocery group, a German broking house and an American mail-order company, the authors found little correlation between loyalty and profitability. Not only are loyal customers sometimes unprofitable; companies can earn profits from disloyal ones.

The work builds on a distinction by an earlier guru, Frederick Reichheld, whose widely read books on loyalty speak of “barnacles”, who cling to the ship but slow its progress, and “butterflies”, who flit past. Mr Reichheld based his observations mainly on interviewing executives; the new work is founded on observing the behaviour of customers.

Far from being cheaper to serve, says Mr Reinartz, loyal customers of the high-tech company in his sample cost more: the company gave them special advice and help. Nor were the stalwarts willing to pay more: the mail-order company's regulars paid less than newer customers for some goods. Nor did they necessarily spread the word: interviews with regular customers of the French grocery chain found that their attitude to the company mattered more than their staying power.

The trouble is that targeting customers often goes against the grain. Mr Reichheld, who is a consultant with Bain, argues that “companies have a difficult time not treating everybody right”. He cites eBay, an online auctioneer, as a company that has been slow to use excellent customer data to give the most profitable customers the best service. Mike Moran, commercial director for Toyota GB, says that his company too takes a democratic approach. After all, today's Corolla driver may one day buy a Lexus. Even when companies know which customers are worth most to them, targeting calls for caution.